In the weeks leading up to the election, In Theory will be asking policy experts to weigh in on the critical questions our presidential candidates should be addressing — but often aren’t. This week we’re discussing the national debt.
In the last fiscal year, the federal government spent 6 percent of its budget to service the national debt. That’s $223 billion going toward paying the interest on borrowed money — and that portion of our budget is only projected to increase as government spending expands.
There is a considerable amount of debate about whether this is actually a bad thing. After all, most Americans and businesses have some level of debt on hand. Debt allows us to buy things we can’t afford now, and that’s often a good thing — much of our national debt is the result of federal spending on programs like Social Security, Medicare, Medicaid, and defense. But the government is already wrestling with massive deficits on a year-to-year basis, so that fact that a growing chunk of its revenue immediate goes to covering its debt obligations calls into question our financially sustainability.
As secretary of state, Hillary Clinton said the debt poses a national security threat. But she’s been noticeably silent on the issue throughout her campaign. In fact, economists have projected that her campaign proposals would increase the debt over the next decade (by how much is disputed — some say as low as $275 billion, others say as high as $1.5 trillion). Meanwhile, Donald Trump has regularly campaigned on eliminating the national debt by cutting government spending — although most economists have balked at his proposals as unrealistic austerity (especially along with his proposals to massively reduce taxes).
What happens if our historically low interest rates rise in the next few years? What’s the plan if we have to spend, for example, twice as much (that’s 12 percent) of our budget on interest rates? How do we avoid falling into the so-called “debt spiral” seen in countries like Japan or Greece?
Josh Bivens is a Ph.D. economist and is the research and policy director of the Economic Policy Institute.
Criticism that this year’s presidential candidates are ignoring the national debt is at least half-misplaced. Donald Trump’s approach to this (and all other issues) is unserious, of course. But Hillary Clinton has taken a perfectly reasonable approach — one without the unwarranted concern that debt is crowding out other policy priorities. She is not whipping up fears about deficits that are unsupported by economic data. She is proposing that her new, permanent spending plans be matched with progressive revenue increases.
These are reality-based stances. The only change I’d urge is to rely more heavily on deficit financing for proposed infrastructure investments.
Clinton summarized her views on using progressive tax increases to pay for new, permanent spending (like investments in early childcare and education) in a recent interview with Vox: “I have put forth ways of paying for all the investments that I make, because we do have the entitlement issues out there that we can’t ignore … and I think we can pay for what we need to do through raising taxes on the wealthy.”
Critics might say that paying for new proposals isn’t enough and that even current fiscal policy is unsustainable. But the Congressional Budget Office projects that this year’s deficit will be under 3 percent of total gross domestic product, a level consistent with a stable debt-to-GDP ratio. Further, recent years have seen a rapid deceleration in health-care costs, the largest drivers of long-run projected deficits by far. Bond markets sure don’t seem worried about U.S. fiscal sustainability, with long-term Treasury interest rates at historic lows.
The CBO does project that by 2026 this deficit will rise to 4.9 percent of GDP, but this projected increase is not driven by new programs or tax cuts or existing programs ramping up in cost. Instead, it is entirely driven by CBO’s forecast that interest rates paid on existing debt will rise sharply and soon. This interest rate forecast is in turn driven by the projection that full employment will be reached soon and will persist. But the assumption that a full recovery — and the higher interest rates it might bring — is right around the corner has been a feature of CBO projections since the Great Recession began. Such projections have not only consistently disappointed, but also have just as consistently driven premature calls for deficit reduction.
One way to ensure that the ever-forecasted recovery actually arrives is through a burst of infrastructure investment — investment the country clearly needs. Clinton has called for an ambitious program. But, differing from her approach, I think that these investments should be deficit-financed, not paid for with new tax increases. It is smart to use debt to finance long-lasting investments that will give future economic returns. It is even smarter to do this when inflation-adjusted, long-term interest rates are nearly negative.
Clinton has admirably recognized that the real-world data signal that near-term deficit reduction is not the most pressing current policy priority, yet she has also clearly shown respect for fiscal realities in calling for new permanent spending to be matched with new revenue. She now should just accept the free lunch of borrowing to undertake a burst of infrastructure investment.